company established in another Member State which gave him “definitive influence
over the company’s decisions and allowed him to determine its activities” was
exercising his right of establishment.
In X & Y v Riksskatteverket and De Baeck v Belgium, the Court indicated that it was a
matter for the referring court to establish whether the freedom of establishment
(Article 43 EC) or the free movement of capital (Article 56 EC) applied.11 If the
required degree of participation for the purposes of freedom of establishment does not
exist, then the refusal of a tax advantage may constitute a restriction on the free
movement of capital.
Free Movement of Capital
Article 56 provides that all restrictions on the movement of capital between Member
States and between Member States and third countries are prohibited. Restrictions on
payments between Member States and between Member States and third countries are
also prohibited.
In the context of companies, the ECJ looks at two questions to determine whether
there is a restriction on the free movement of capital: (i) is the provision liable to
dissuade residents of a Member State from investing their capital in companies
established in other Member States?, and (ii) is the provision of the Member State
liable to constitute an obstacle to companies established in other Member States
wishing to raise capital in that Member State? If either or both of the above questions
are answered positively, the provision constitutes a restriction on capital movements.
Article 58 provides for a limitation on the free movement stipulated in Article 56. It
allows Member States to apply provisions of their tax law which distinguish between
taxpayers who are not in the same situation with regard to their place of residence or
with regard to the place where their capital is invested. It also allows Member States
to take all requisite measures to prevent infringements of national law and regulations,
in particular in the field of taxation and the prudential supervision of financial
institutions, or to lay down procedures for the declaration of capital movements for
purposes of administrative or statistical information, or to take measures which are
justified on grounds of public policy or public security. However, any such measures
and procedures cannot constitute a means of arbitrary discrimination or a disguised
restriction on the free movement of capital and payments contained in Article 56.
In theory, therefore, Article 58 allows different tax treatment of residents and non-
residents and of domestic and foreign source investment income. However, as we
will see from the case law of the ECJ, this does not give Member States a carte
blanche to introduce measures which lead to arbitrary discrimination or disguised
restrictions on the free movement of capital.
Interaction between the Treaty Articles
To date, the case law of the ECJ in corporate tax matters has concentrated more on the
freedom of establishment than on the free movement of capital. Both Article 43 on
freedom of establishment and Article 56 on free movement of capital may be
applicable in a case involving a direct investment. When cases are brought under
11 (Case 436/00) [2002] ECR I-10829 and (Case C-268/03) [2004] ECR I-05961 respectively.